Split Decision for Voya in Excessive Fee Suit

Motions to dismiss a big suit by a small plan participant brought by a law firm with a personal injury suit pedigree have met with mixed results from a federal judge.

The suit (Goetz v. Voya Financial, Inc., D. Del., No. 1:17-cv-01289-UNA, complaint filed 9/8/17), brought by plaintiff Sharon Goetz, a participant in the (approximately) $3 million Cornerstone Pediatric Profit Sharing Plan (which has 19 participants), claims that Voya Financial, and its subsidiaries violated and knowingly participated in violations of ERISA, and is seeking “the return of the undisclosed excessive and unreasonable asset-based fees charged by Voya for recordkeeping and administrative services, and to prevent Voya from charging those excessive fees in the future.”

In addition to alleging that they were overcharged, the plaintiff here alleges that Voya concealed its true fees by “adding Voya’s asset based fees to the operating costs of the various mutual fund options in participant fee disclosures,” charging recordkeeping fees based on assets rather than participant count (“reasonable recordkeepers charge recordkeeping fees for each plan participant, rather than as a percentage of assets”), “increasing the annual operating cost of every mutual fund investment option available to participants in the Cornerstone Plan and other similarly situated plans by 0.67% to 1.80%,” and took advantage of revenue-sharing and collected 12b-1 fees from 19 of the 26 funds offered by the Cornerstone Plan, including 10 of the 12 Voya proprietary funds.

What makes this suit big is that the plaintiff has brought suit[i] on behalf of participants in the 47,000 plans that Voya services – and has alleged that they are charging (potentially) “over $1 billion a year in excessive compensation at the expense of the individual plans and their participants.” 

Four, ‘Told’

In considering the motion to dismiss, Judge Colm F. Connolly of the U.S. District Court for the District of Delaware noted that plaintiff Goetz alleged four claims for relief: 

1. that Voya breached its fiduciary duty under 29 U.S.C. § 1104(a)(l) by charging excessive fees; 
2. that Voya breached its fiduciary duty under §1104(a)(1) by making false and misleading statements about its fees in its “Rule 404a-5 disclosures”[ii] that are required by 29 C.F.R. 2550.404a-5;
3. that Voya is liable for breaches of fiduciary duty by co-fiduciaries under 29 U.S.C. § 1105(a)(2); and 
4. that even if Voya was not deemed to be a fiduciary, Voya’s unreasonable compensation for its recordkeeping services makes it liable as a “party in interest” for a “prohibited transaction” between Voya and the plan.

With regard to the first, Judge Connolly observes that "a party does not act as a fiduciary with respect to the terms in the service agreement if it does not control the named fiduciary's negotiation and approval of those terms,” and then goes on to explain that the fees Voya charges the Plan and its participants were set in the contract, and that at the time those fee schedules were proposed, “Voya had no relationship with the Plan or its participants and could not have been a fiduciary.” He goes on to note that “The Daily Asset Charge is set by a schedule the Plan agreed to in the Contract, and the only changes to Daily Asset Charge occur based on the total asset value of the Plan.” Ultimately, he concluded that “Voya was not a fiduciary by virtue of choosing the Plan's investment options. And because Voya was not a fiduciary of the Plan with respect to the fees, it cannot be liable for breach of fiduciary duties for charging excessive fees.”

Disclosure Closure?

There was also the issue of an alleged breach of fiduciary duties by “false and misleading” Rule 404a-5 disclosures. “Goetz’s theory is that by combining the funds’ operating expenses with Voya’s fees rather than listing them separately Voya is misleading the beneficiaries into thinking that the combined number only represents the operating cost of the fund,” Connolly writes. 

“However, Voya argues that it is not a fiduciary because preparing 404a-5 disclosures is a purely ministerial function,” Connolly comments, going on to state that the Amended Complaint alleges that “VOYA maintains discretion to determine the contents of the disclosures to Plan participants required by BRISA including the fee disclosures required by ERISA and in fact prepares and distributes the disclosures to Plan participants.” Judge Connolly therefore concludes that “Because Goetz has alleged that Voya prepares and delivers the disclosures to plan participants and has discretionary authority to determine the contents of the disclosures, Goetz has properly alleged that Voya is a fiduciary with respect to the 404a-5 disclosures.”

Moreover, he notes that “There is a substantial likelihood an employee looking at these disclosures would think the listed fees were paid only to the listed funds as opposed to the listed funds and Voya,” going on to note that if that were the case “…then the employee would be unlikely to complain about Voya’s fees to her trustee and advocate for a change in service provider, because she would not realize how much Voya was charging her.”

Therefore, he concluded that “Plaintiffs have at least established materiality to the degree required to survive a motion to dismiss,” and that “Goetz has sufficiently pleaded a breach of fiduciary duties claim with respect to the 404a-5 disclosures.”

As for the fourth allegation, Judge Connolly explains that “Because Voya was not a party in interest when it negotiated the Contract – including the fee schedules – Voya cannot be held liable under § 1108 for charging excessive fees.”

Judge Connolly therefore granted Voya’s motion to dismiss the claim for breach of fiduciary duties for charging excessive fees, Goetz’s claim for breach of co-fiduciary duties for charging excessive fees, and Goetz’s party-in-interest claim. 

But he denied the motion that sought to dismiss plaintiff Goetz’s claim for breach of fiduciary duties for providing “false and misleading” Rule 404a-5 disclosures or dismissal of and Goetz’s claim for breach of co-fiduciary duties for providing “false and misleading” Rule 404a-5 disclosures.

What This Means

This is, of course, far from a full adjudication of the issues and facts. Basically, the judge here felt there was a plausible case made that the fee disclosures provided were misleading, sufficient to keep the issue alive for trial. 

The issue of the adequacy of the disclosures is worth keeping an eye on, however, particularly since it doesn’t seem to focus so much on the fee itself, but on its disclosure as to the ultimate recipient of the fee, and how that might impact a participant-plaintiff’s pursuit of a remedy.